How to boost your age pension entitlement
STEP by step Centrelink has been making it harder for people to qualify for the age pension.
But there is hope in the way of a little-known strategy that can legally boost your age pension entitlement by thousands of dollars a year. However, like most things, it comes with risk and careful planning is required to pull it off.
On January 1, 2017, changes were made that reduced the maximum amount of assets you could have outside of the family home and still be eligible for a part age pension. Previously, if you were a homeowner couple, you could have up to $1.18 million and be eligible for a part age pension. Today, if you have more than $848,000 in what Centrelink calls "assessable assets", you will receive no age pension at all.
The result of the 2017 change was that 100,000 retirees had their age pensions cancelled and a further 230,000 retirees had their age pensions cut. And it didn't stop there. The change continues to have an ongoing effect for new retirees. Each year there are thousands of people that reach age pension age who under the old rules would have picked up a part age pension but, based on the current rules, receive nothing.
When Centrelink considers your level of assets in an age pension application, they look at assessable assets - which is pretty much everything you own with the exception of your family home (and up to 2ha of attached land) and a few other allowances such as funeral plots, accommodation bonds and granny flat interests. For some people who are on the wrong side of the assets test threshold by a small amount, they have employed strategies to reduce assessable assets such as spending money on the family home via renovations, bringing them below the threshold for a part age pension.
For others with assets that exceed the maximum assets test threshold by a significant amount, one path to consider is the gifting strategy. Centrelink allows you to gift up to $10,000 a year and a maximum of $30,000 over a five-year period. Anything in excess of this will lead to a situation where you have what's known as a "deprived asset", whereby Centrelink will still count the asset as yours for five years even though you don't own it any more.
The rationale behind this is that Centrelink doesn't want people to manipulate the system and sell assets such as their car to a family member for $1 so they can reduce their assessable assets and get a better age pension outcome.
Instead, Centrelink will still count any assets sold below market value or given away for five years. But the good news is that after the five years has passed, Centrelink stops counting it as a deprived asset and it drops off the assets test.
The implications of this is that for people who are likely to have assets above the maximum age pension threshold by age 67, they could consider doing a self assessment five years prior to age pension age and consider whether the gifting strategy works for them.
People should not give away assets purely to obtain a better age pension entitlement as it may affect their overall ability to generate retirement income and meet larger costs as they arise. In other words, it would not be prudent to withdraw $500,000 from super and give it to your children as this money would have been otherwise earning income for you each year in a tax-free environment.
The more appropriate circumstances whereby the gifting strategy could be employed is where there is a non-income producing assets that could be given as an early inheritance. An example of this would be a holiday house or a vintage car that was due to be given to a family member after death as per the terms of a will.
So rather than gifting after death, the asset is passed to the beneficiary early, which may have the impact of increasing an age pension entitlement after five years once that asset no longer counts towards the assets test.
The key to remember is that a gift is a gift. If you give away an asset, consider it gone forever. If you ask for it back later, don't expect that it will be returned. It may have been spent, sold or even lost in a financial settlement of a relationship breakdown. But for those who have non-income producing assets and are happy to gift it early rather than in a will, the side effect is that it could boost your age pension entitlement dramatically after five years has passed.
James Gerrard is the principal and director of Sydney financial planning firm FinancialAdvisor.com.au